ALTERNATIVES MODULE 80

Question 1

80.1 What is the difference between direct and indirect investment into natural resources:

Answer 1

Question 2

80.1 What are the two types of commodities?

Answer 2

Question 3

80.1 What is the link between timberland and real options?

Answer 3

the ownership of the land and the harvest means farmers have a real option of when to harvest (when best markets price eg)

Question 4

80.1 What are the types of Land investments?

Answer 4

Question 5

80.1 What are the sources of return of land investments?

Answer 5

Question 6

80.1 how does location of the land impact its return and commodity prices?

Answer 6

Question 7

80.1 What are TIMOs?

Answer 7

Question 8

80.1 TABLE: raw land, farmland, and timberland and their features: Return driver, revenue, value, main risks, owners!

Answer 8

Question 9

80.1 What are the features of timberland and farmland investments?

Answer 9

Question 10

80.1 What are farmland and timberland risks?

Answer 10

Question 11

80.1

Answer 11

Raw land

Question 12

80.2 What are direct vs indirect commodity investments?

Answer 12

indirect - avoid difficult carry costs

Question 13

80.2 What re the features of commodity returns?

Answer 13

Question 14

80.2 Name 5 commodity sectors:

Answer 14

Question 15

80.2 How are commodities affected by Physical location, grade, and quality?

Answer 15

Question 16

80.2 What are commodity derivatives?

Answer 16

Question 17

80.2 What are the benefits to investors of commodity derivatives?

Answer 17

Question 18

80.2 What are CTAs?

Answer 18

Commodity Trading Advisors.

They do all their trading with futures.

They win in the area of trends.

Question 19

80.2 What are exchange traded products?

Answer 19

Notes track the index but dont own it

Question 20

80.2 How do we price a commodity forward?

Answer 20

The no-arbitrage relationship is used to price the commodity forward

Question 21

80.2 If a commodity is bought today in the spot market, and carried for one year, that costs are incurred, and benefits gained?

Answer 21

Question 22

80.2 What is the no-arbitrage relationship of commodity forwards?

Answer 22

That these two red headers have to be equal!!

Question 23

80.2 What is the fair value of a long one-year commodity derivative contract?

Answer 23

1 year time = 1

reflect the fair value of owning the commodity in real life, if there is a difference, it implies an arbitrage

Add the benefits and deduct the costs

Question 24

80.2 What is a contango and what is a backwardation?

And what does imply about supply of the commodity?

Answer 24

Question 25

80.2 How is the fair value of a commodity forward driven by the costs and benefits of carry over the period?

Answer 25

Question 26

80.2 What is con tango and backwardation? Describe the effect on future spot price in each scenario - and how supply effects this relationship.

Answer 26

Question 27

80.2 What is roll down return?

Answer 27

Letting time roll over to realise a return at the end of a long position. (you are long at a discount and you roll up for a profit). Assumes no changes to the market structure at all

Question 28

80.2 In terms of numbers within the forward contract pricing mechanism, what can also show us a backwards market?

Answer 28

If the convenience yield is > cost of carry AND VICE VERSA

Question 29

80.2 What are the supply and demand factors for commodities? RISK

Answer 29

SUPPLY IS SLOW TO CHANGE - is inelastic

Question 30

80.2 What are the risk and return of commodities?

Answer 30

Question 31

80.2 How can commodities be an inflation hedge?

Answer 31

Question 32

80.2 How can commodities help with portfolio diversification?

Answer 32

business cycle - boom period, uses more commodities for building etc

Question 33

80.2 The convenience yield of a commodity is best described as?

Answer 33

A benefit that reduces the forward price (it is also a cash benefit from holding a physical commodity, but best answer is above)

Question 34

80.2 Which of the following is most likely to provide steady cash flows? Raw land, Farmland, Timberland?

Answer 34

Farmland. Farmland provides the steadiest cash flows compared to timberland and raw land. Farmland can generate cash flows from leasing the land or selling the crop each year. Timberland provides cash flows, but owners have more discretion over the timing; they can choose to let the timber grow or harvest it for sale. Raw land does not generate any current cash flow.

Question 35

80.2 Funds that invest in specific commodity sectors such as oil and gas or precious metals are best described as:

Answer 35

Specialized funds. Specialized funds focus on specific commodities such as oil and gas, grains, precious metals, or industrial metals. Some managed futures funds may concentrate on specific sectors (e.g., agricultural commodities), while others may be more diversified. Balanced funds invest in both stocks and bonds.